The Art of A Barely-Done Deal

TL;NGTR (too long Not going to read) SUMMARY

Perspective after the fact

Get Everything In Writing. Seriously. No matter who's buying or selling it. 


Recently I had the dubious honor of completing a mortgage deal for a private real estate deal. I have since talked with the new owners and felt that there were some mighty fine lessons to be learned from their experience and why in all real estate deals, you should get EVERYTHING in writing and take your time in purchasing. This isn't a bike you are talking about here, this is a home worth potentially hundreds of thousands of dollars. Don't commit it if you don't have it.

#1 RULE: Don't let the sellers' needs take precedence over your own.

Now I've already talked about some of the concerns regarding attempting to sell your home privately in this post here, this time I will talk about actually completing a privately sold deal and the aftermath.

In this instance the buyers were a young, professional woman with two children and her father-in-law. The sellers had a close relationship with the buyers, being neighbours and also being their child's day care. The children go to the same school, are in the same class and consider themselves best friends.

The sellers were also looking to purchase and any offer they made was subject to their house being sold. They were anxious to sell as twice they have lost out on a purchase due to the above-mentioned subject.

They agreed to a price for the home and that's where I come in.

First, the 5 C's of the buyers.

Credit - 

The buyers recently sold their previous house and were currently renting but wished to get back into a long-term housing situation. They had no personal loans to speak of and only one credit card between the two of them. The husband had a low credit rating (no credit cards) yet had suitable income but this put them in a higher than necessary qualifying interest rate. He needed to build up his credit score to be considered for a lower percent loan. I explained that if there was another family member (with better credit) willing to be on title with the wife then they could qualify for the lower interest mortgage loan. The husband could then contribute to the mortgage in place of the family member. When his credit score was better he could replace the family member on the title. In steps Family Member on behalf of Son, and this enabled them to save over 3% points on a loan, resulting in a savings of over $300/month on their mortgage.

Capacity - 

Both the husband and wife are employed full-time with good income. There is lender concerns about their ability to pay the mortgage, based on the lower rate with the other family member on title. In effect, the husband has an agreement to pay 'rent' until his credit situation cleared up. They had the minimum 5% down payment required in cash from the sale of their previous house and plenty left over for emergencies.

The family member co-signing also had great income from a pension and assets - this qualified them for the lowest rate possible.

Character -

They were a young family who used the proceeds of the sale of their first house to pay off their student loans, car loans and were both in decent-paying careers. They had more than adequate cash savings and were looking to find a long-term home in the community of their liking. They were currently renting and long term prospects of their jobs were good.

The family member had excellent credit, owned two houses mortgage-free and was making a great pension. On the surface, this looked to be an excellent partnership with little risk to the lender.

Conditions - 

This is where things started to go sideways for the couple. Due to it being a private sale, a lot of negotiations were done without the aid of a third party (generally this is where the Realtor earns their commission). They were advised to hire a Realtor to at the minimum create the contracts which was done. The sellers wanted no part of the cost of this Realtor (as that was the point of selling privately). The buyers were okay with that. This should have created a small warning sign.

In my role as a mortgage broker, I applied to a suitable lender for their needs and they were accepted on the condition that an independent appraisal be done of the property. This was arranged between the lender and seller and the appraisal came in at $6000 over the agreed upon price. The buyers either had to go back and get the asking price lowered or come up with an extra $6000 on their down payment.

Summary; a lot of people are asking or paying too much for their homes

The sellers meanwhile found a house that they liked and were under a time crunch to have their house sold. They asked to move the completion dates forward, nearly three months ahead of the end of the couple's lease agreement. Short story, the buyers were now coupled with an extra $6000 for the down payment and both a rent and mortgage payment for the first few months of ownership which affected their bottom line.

The sellers agreed to compensate in the way of adding a playhouse and reimbursing them one month's rent which the buyers found fair. They did not get this in writing, instead taking them at their word considering their close relationship. This would come to bite them hard.

foreshadowing...

Collateral - 

This was the #2 problem for the couple or more specifically the family member co-signing. As previously discussed a lender wants to know what the mortgagee brings to the table. This is typically things that can be quickly liquidated for cash in case of a budgeting problem. They both had vehicles and savings in the bank. The family member had two houses mortgage-free, was earning income from renting one house and had a decent pension. This was what was declared on the mortgage application as it also provided proof of good character, credit and capacity.

When it came down to prove these claims, the family member became resistant to providing proof. They didn't understand why an underwriter needed proof of such claims if the application was already accepted. The partner of the family member (who also jointly owned the assets listed) believed that by providing proof of said assets, they would be unable to sell said assets if they chose. She believed that she would have to sign something despite assurances her signature wasn't required (this stipulation can vary depending on jurisdiction).

She was mistaking the word collateral in this context. Despite my assurances that this is not the case and a detailed explanation of how a bankruptcy would proceed (even if there was no indicators of such a possibility) they became more and more unwilling to provide proof of collateral. When they finally provided proof, they blacked out large portions of bank statements and submitted only a few pages of their rental agreement with their tenants. They omitted proof of them owning one house which on the face of it now changed their living situation to 'homeless' as remember, they provided proof that the other house they owned was rented.

In their effort to maintain their privacy they now have actually drawn more attention to themselves. A lender isn't going to look at your bank statement and note that you spent $11.50 at the 7/11 or pretty much any other transaction on your statement. They are simply looking for proof of income, usually in the form of direct deposits. When they ask to see a rental agreement and a lot of pages are omitted, they have to question what is being omitted and why. Those omissions could affect the overall deal and leave the buyers forfeiting on the house sale as they failed to provide proof of collateral, capacity and character.

In conclusion;

We are now nearing a perfect storm for the buying couple; they have an agreed upon offer. They have a family member resistant to provide proof of collateral, capacity, character. They have sellers that are moving the sale date forward affecting their capacity and credit and have had to ask for an extension on the closing date due to missing paperwork. They have agreed to an inflated price affecting their immediate capacity to support both rent and mortgage.

Did they still get their mortgage?

Hell yeah! They took the sellers at their word that they would help compensate them for the extra mortgage payment due to completing early.

Do they feel they got screwed?

Hell yeah!

After the completion date and money changed hands, the sellers reneged on their offer to compensate them for the extra rent and leave the playhouse. They didn't get this offer in writing and the sellers are maintaining a 'I don't recall that conversation' defense and stating that they felt the extra stress caused by the buyers in failing to meet the completion date justifies their actions.

Possible recourse;

Either the sellers stand by their word and provide the agreed upon compensation or there is a strong case for Small claims court. Although the buyers did not get specific statements in writing, a judge may take the sheer amount of facts presented by the buyer into consideration (relationship, sellers' intentions, recollections of conversations) and weigh them with the sellers (a continual 'don't recall that conversation' would be suspicious).